January 28, 2017 In Uncategorized



The Indian banking system lays down certain norms and guidelines for sanctioning credit facilities to an individual or a company. As per the Reserve Bank of India (RBI) circular number DBOD. No. Dir. BC.16/13.03.00/2014-15, a company (including its promoters) to which a bank may lend money should have adequate net worth and an excellent track record of servicing loans availed from the banking system. Moreover, the amount of bank finance to be provided should be reasonable in terms of the bank’s size, its net worth, business and risk profile. According to the RBI circular number DBOD No.Dir.BC. 14/13.03.00/ 2010-11, net worth comprises of Paid-up capital plus Free Reserves including Share Premium (but excluding Revaluation Reserves), Investment Fluctuation Reserve and credit balance in Profit & Loss account, less debit balance in Profit and Loss account, Accumulated Losses and Intangible Assets.

The laws that govern the issue of banks lending funds to companies having low net worth and credit rating are the Banking Regulation Act (the “BR Act”) 1949 and the Prevention of Corruption Act (the “PC Act”) 1988.

  • (i) The BR Act, which was enacted to govern the law related to banking, provided under section 46A that every chairman, managing-director, manager, etc of a banking company shall be deemed to be a public servant for the purposes of Chapter IX of IPC. Subsequent to the enactment of PC Act, Chapter IX of IPC was repealed.
  • (ii) The PC Act, which was enacted to combat corruption among public servants in India, provided under section 2 (c) (viii) that a public servant is a person who is authorized or required to perform any public duty by virtue of the office he holds, and under sections 7 to 12 that a public servant shall be penalized with imprisonment and fine for any offence committed under the Act.


But there was a lot of confusion as to whether the scope of the term ‘public servant’ would extend only to the public sector and government employees. This issue was settled by the Supreme Court of India in the case of Ramesh Galli vs. CBI through Superintendent of Police, Bank Securities & Fraud Cell & Anr 2013, where it had held that the term ‘public servant’ as defined in the PC Act has a wider scope and includes bankers working in a private bank, who are required by law to perform a public duty, in the discharge of which the State, the public or the community at large has an interest. Herein, it was held that by virtue of the relevant provisions of the PC Act read with BR Act, the Chairman and the Executive Director of the Global Trust Bank had misused their official position to illegally sanction higher credit limits to a private company, thereby causing wrongful loss to the bank.

Recently in the Vijay Mallya-Kingfisher Airlines case, the C.B.I. had conducted an investigation in the and discovered that the officials of the government-owned financial service company, i.e. Industrial Development Bank of India (IDBI) including ex-IDBI Bank chairman Yogesh Agarwal and former deputy managing directors were involved in the alleged sanction of loans to Kingfisher Airlines despite its negative net worth and low credit rating in the market. This action of the Bank officials had caused a wrongful loss of over Rs 900 crore to the Bank. The C.B.I. had filed a charge-sheet invoking section 120B (criminal conspiracy: imprisonment for a maximum of six months or fine or both), section 420 (cheating: imprisonment for seven years and fine) of the Indian Penal Code (IPC) 1960; and section 13(1) (d) and 13(2) (criminal misconduct by a public servant: imprisonment for a minimum term of one year extendable to seven years and fine) of the PC Act.

The aforesaid laws strictly govern the conduct of public servants who abuse their official position for any pecuniary advantage, etc and also penalize them for their criminal misconduct.


Harini Daliparthy

Legal Associate

The Indian Lawyer

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